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Incredibly, The a2 Milk Company is now New Zealand's biggest listed public company by market capitalisation.

At yesterday's price, a2 Milk is worth $9.57 billion — bigger than the power generating colossus Meridian Energy ($7b), bigger than the highly-rated Auckland Airport ($7.5b) and double the size of the troubled Fletcher Building ($4.5b). For the sceptics — and there have been plenty — a2 Milk's success has been hard to swallow.

Following last month's news that a2 Milk had lifted its first-half net profit by 150 per cent to $98.5 million, and formed a strategic relationship with Fonterra, the stock hit a record $13.23.

Analysts say the big things in a2 Milk's favour are its ability to differentiate its product from the rest, its very low capital requirements, and its ability to deal with unofficial trading channels into China.

Fund manager Harbour Asset Management has long been an a2 Milk investor, once owning more than 10 per cent of the stock.

It's a2's ability to adapt to the conditions that is the key — there is no huge bureaucracy or committee decision making.

Harbour analyst Oyvinn Rimer has been following the company for 10 years. He's a fan.

While Rimer is not surprised that a2 Milk is now number one, what does surprise him is how quickly it got there.

"I do get challenged on this stock by nearly all my clients and all my colleagues," he says. "We have done an enormous amount of work on this stock and we remain pretty confident and optimistic about the outlook."

Rimer bases his optimism on the fact that a2 Milk is essentially still a player only in Australia and China, and many other markets remain uptapped.

"Fonterra obviously gives them the scale that they would need to trial in other regions," he says.

Having spent a decade studying the stock, Rimer says he has always been a promoter of a2 Milk's product, but has had his doubts about its strategy.

"I mean, infant formula was a risky business, and it still is in terms of regulatory changes. It has all sorts of other moving parts," he says.

"Those sorts of risks have probably mellowed a little bit ... we are starting to understand the Chinese regulator a bit more — they seem to be a bit more pragmatic when it comes to managing food supply.

"It's a2's ability to adapt to the conditions that is the key — there is no huge bureaucracy or committee decision-making."

And Rimer says a2 Milk's exhaustive research and development work in its early days has paid off.

"They have done all the investing into scientific research; no one else has spent a dollar."

Still, it's common to hear people say the science behind a2 Milk is inconclusive.

Plenty of products claim to offer health benefits, but in many cases, doubters say the "placebo effect" may be at work.

Placebo or not, Rimer says there are now an overwhelming number of people who are supporters of a2 Milk's product.

And in these days of social media, word of mouth endorsement is powerful.

Rimer says a2 Milk has been clever in forming strategic partnerships — particularly with Canterbury's Synlait Milk in the early days.

"Everything that they do has long-term strategic implications," he says.

Unlike most other fast-moving consumer goods businesses in New Zealand, a2 Milk does not have a lot of capital tied up in factories and equipment.

A behemoth like Fonterra has billions invested in factories up and down the country, which only run at full capacity for a short time during the dairy season's peak, making it tough for those assets to earn their keep.

"They [Fonterra] are stuck in a low-returning business model due to the fixed assets and especially when you have seasonality," says Rimer.

Analysts point to Australia as being a springboard for a2 Milk.

Bringing in Australian Geoff Babidge to lead the company was a major turning point, as a2 Milk went from being an intellectual property-based company to a true commercial success.

Rimer says that even at today's elevated share price, that price and the company's earnings are "not completely divorced".

In infant formula, a2 Milk had 5.4 per cent of the online retail market in China at the end of last year, up from 3.5 per cent six months earlier.

But while online sales are important, most infant formula in China is sold "offline" — in shops — mostly in dedicated mother and baby stores.

Assuming offline sales can grow by 3 to 4 per cent, that would have a huge impact on a2 Milk's earnings.

Another factor supporting a2 Milk is the fact that it does not face supply constraints, given that probably 30 per cent of the world's cows produce the A2 beta-casein.

Rimer says the only real possible constraint could be getting enough manufacturing capacity.

How did a tiny business transform itself into the NZ sharemarket's most valuable company? Photo / File

Babidge himself sees 2007 as a turning point — the year when the business model evolved from licensing to a fully-fledged operating company.

"This was key, as the business needed to develop capability across each part of the supply chain and build direct engagement with consumers.

"In addition, we determined to focus on one key market to build brand recognition and scale — this was the premium segment of the fresh milk market in Australia," he says.

A2 Milk has made up a big part of Sydney-based Ophir Asset Management's portfolio since it listed in Australia in 2015.

Ophir's co-founder and senior portfolio manager, Andrew Mitchell, says there are several different layers to the a2 Milk story.

"Really, a2 Milk was the right product at the right time in the infant formula space," he says.

"Innovation in food is very rare — there's no new food — and so a2 Milk is a brand based on innovation.

"What we're seeing now is confirmation of that innovation and we're seeing Australian milk brands advertising that they have the A2 formula as well," he says.

"Freedom Foods has just said that they are going to launch an A2 equivalent infant formula brand, so you're seeing innovation and other big brands supporting that innovation."

Mitchell says fast-moving consumer goods businesses find it difficult to get international scale — to build logistics chains and so on, and to do it fast.

"Getting those logistics right is a very hard ask, but their distribution has been built very early into China on the daigou [grey market]," he says.

The fact that the daigou players have taken on all the risk has enabled a2 Milk to quickly gain scale in China.

"The third point is obviously 'brand New Zealand', and 'brand Australia' — in terms of food and health products — is very strong in China.

"They [China] obviously have had scares with their infant formula and babies have unfortunately died over there.

"They look to the West to find the best products and are very health conscious."

Mitchell says he does not believe a2 Milk shares are over priced.

"A2 Milk is the fastest-growing online infant formula and there's no reason it can't end up with 10 per cent market share [in China] like Aptamil milk and other European premium brands," he says.

"They're also entering the US market through selling milk, which we think will be a precursor to infant formula to the United States and also growing throughout Asia."

Mitchell says a2 Milk's valuation is "obviously extended", but in some respects it is less risky now than it was a year or two ago because it seems to be reaching critical mass in terms of its market share. "We're not concerned — we think the valuation is fine."

News that former Jetstar chief executive Jayne Hrdlicka will take over from Babidge this year has been well received in the Australian investment community, and Mitchell says a2 Milk has done well to secure "someone of her standing and her capability".

Looking ahead, Mitchell says a2 Milk's progress in China would form a "runway" for its ability to grow in the US, Britain and other parts of Asia.

The a2 Milk Company was founded in New Zealand in 2000 by scientist Dr Corran McLachlan, with the support of business partner Howard Paterson, following the discovery that cows naturally produce different types of milk proteins.

Most cows produce the A1 and A2 versions of beta-casein protein, but about 30 per cent of the world's herd produces just the A2 variety.

A2 Milk believes that the A2 beta-casein protein milk is better for people, particularly those who have trouble digesting milk.

It has pointed to a number of studies that support the digestibility theory.

However, the company has pulled back from its initial claims which caused much contention in its early days, to the effect that A2 milk was less risky than standard milk containing A1 and A2, which it linked to heart disease, autism and some types of diabetes.

A2 Milk works with farmers to identify cows which naturally produce milk containing only the A2 protein, and free from all A1 protein, using a DNA test.

Cows certified as producing only the A2 milk are then segregated and milked separately.In its original form, The a2 Milk Co was developed to license intellectual property around the benefits of milk and dairy products containing only the A2 version of the beta-casein protein.

From 2007, the business model evolved from licensing to a fully-fledged operating company engaged in all key business functions, including sourcing, manufacturing, marketing, sales and distribution.

That was key, as the business needed to develop capability across each part of the supply chain and build direct engagement with consumers.

It decided to focus on one key market to build brand recognition and scale – the premium segment of Australia's fresh milk market.

That's when things took off for a2 and the company now provides 10 per cent of Australia's fresh milk supply.

It also reflects a2's potential in the US, where the company is expanding, and further afield.

Unfortunately, founders McLachlan and Paterson have not been around to see a2 Milk's success — both died in 2003.

Slow start before stellar run

A2 Milk shares have had a stellar run.

The stock listed on the NZX Alternative Exchange in 2004. Price: 10c.

At yesterday's share price ($13.18), an investor who bought $10,000 worth of a2 stock at listing — without participating in capital raisings since then — would now be sitting on more than $1.3 million.

But it's been a rollercoaster ride: nine years ago, the stock was trading as low as 5c.

Harbour Asset Management has been a long-term investor in a2 Milk, and now owns more than 5 per cent of its shares.